Interest rate cut next week ‘nailed on’ as UK economy grows just once in seven months
Experts estimate that the interest rate cut before Christmas is now “finalized” after the shock contraction in the economy in October.
Pre-Budget concerns and speculation about tax increases were blamed for the unexpected contraction of the economy for the second time in a few months.
Official figures show the economy shrank by 0.1 percent in October, following a 0.1 percent decline in September. This means the UK economy has grown just once in the last seven months.
Most economists had expected a small increase of 0.1 percent for October, as hopes for a manufacturing recovery continue, led by Jaguar Land Rover’s recovery from a major cyber attack.
But today’s figures mean it is now highly likely that the interest rate will be cut to 3.75 per cent when the Bank’s monetary policy committee makes its decision on Thursday.
Ruth Gregory, deputy head of UK economist at Capital Economics, said the surprise contraction was “yet another reason to expect the Bank of England to cut interest rates”.
Meanwhile, Suren Thiru, economic director of the Institute of Chartered Accountants in England and Wales (ICAEW), said the pre-Christmas rate cut is now “certain”.
“These figures confirm a colorless October for the economy, with pre-Budget concerns paralyzing activity in key sectors despite an increase in production due to Jaguar Land Rover’s return to production.
“This dismal debut may have been followed by a similarly turbulent November, with the damage to business and consumer confidence inflicted by wild speculation ahead of the budget freeze on wider economic activity.”
He added that the after-effects of the budget could mean the UK’s economic outlook is “weaker in the short term”.
“Policy easing in December looks set to be assured, as these dismal figures are likely to further fuel fears among rate-setters about the health of the UK economy.”
The Office for National Statistics (ONS) said car production had made only a “slight” recovery from Jaguar Landrover’s woes.
Recently, many businesses have stated that activity in the economy has slowed down due to increased speculation about possible tax measures ahead of the Budget.
PwC chief economist Barret Kupelian said the “big story” behind the figures was that speculation around the Budget was “keeping households and businesses in a wait-and-see mode”. He warned that the timing of the budget at the end of November meant “the November GDP report will look similarly weak before any post-Budget impact emerges”.
Andy Haldane, the former chief economist at the Bank of England, said last month that lingering concerns about the Budget and leaks about possible tax rises were “causing businesses and consumers to pull back”.
Earlier this week Chancellor Rachel Reeves said there was “too much leakage” in the run-up to the Budget and it was damaging.
Shadow chancellor Sir Mel Stride said the latest GDP hit was “a direct result of Labour’s economic mismanagement”.
ONS data revealed that car manufacturing activity increased by 9.5 per cent on a monthly basis in October. But this was only a partial recovery from the 28.6 percent drop following the cyberattack in September.
JLR was forced to pause production of its cars for more than a month after it was targeted by hackers, gradually resuming production in October.
A Treasury spokesman said: “We are determined to challenge predictions on growth and creating good jobs, while also helping us invest in better public services so that everyone is better off.”
